Question

Governments are fond of using sin taxes. The stated reason is that they discourage some stated bad behavior. A big appeal of them to policy-makers, however, is that they generate stable tax revenue. Identify a sin tax and discuss why it would generate stable tax revenue. Evaluate how that tax revenue might change over time and why. Finally, discuss who actually pays the sin tax.

Answer 1

Sin tax are specific excise taxes levied on goods which are supposed to be discouraged and are harmfull for individual in terms of physical and mental health, and hence society. Most common examples are taxes on tobacco products and alchohol/liquors. They can also founded to be levied on gambling and soft-drinks, etc. The can be classified as of higher than usual percentage. They are usually taken as excise duty from the sellers.

The tax on ciggarettes is a sin tax. Any of these sin-products have a property that their consumption is much higer than necessary. In fact, to most, the product is not even necessary, but is still consumed in high proportions. Tax on ciggerettes would generate a stable revenue, as the smokers are usually consistent in their behavour, ignoring the younger ones, who are kind of triers. An average smoker is identified as one in most of the smokers, who would smoke the same numbers of sticks per day, without much variations. That is why, it is quite logical to levy tax on ciggarettes, as the number of ciggarettes consumed in any regions wouldn't vary much. Also, even if tax is increased, that average smoker wouldn't be much discouraged as some of the smokers who are with less income or are students would do. Thus, it can be safely argued that tax reveneu on cigarettes would be consistent over time. The same arguements can be applied to other tobacco products and liquor, but not on soft-drinks and fast-foods, as they have many close substitutes.

The tax revenue from ciggarettes would change over time by only two factors - the number of smokers or number of ciggarettes consumed, and the tax percentage/amount. The tax percentage, upto some extent, can be imposed for a stable revenue. Assuming it to be constant over time, the number of smokers are the one which would affect the revenue. Historically, as population increased, so did the number of smokers, and hence the tax revenues aslo.

The tobacco and alchohol products can be identified to be having quite inelstic demand. In that case, it is the buyers who actually pays most the sin tax. But soft-drinks and fast-foods, which are not considered to be that much addictive, have about unitary elastic or more elastic demand, due to the availability of various local substitutes. In that case, the most of the tax is payed by sellers.